Pakistan, with a population of 24 crore (60% living in rural areas) has an alarming population growth rate of 2.4% with a demography of almost 60 % youth (under 30); the dilemma is that the youth bulge is becoming a burden on the economy instead of an asset. Labour force participation remains stagnant at 37.2%, and the development sector, which should be a catalyst for change, suffers from underfunding and misallocation. The most glaring example is education: 28 million children remain out of school, higher education funding has been decreased, and technical and vocational education receives negligible support. The emphasis of the federal budget 2025–26 reflects a familiar and troubling pattern: an economic strategy heavily anchored in debt repayments and defence, with little attention to the foundational challenges of climate resilience, education, health, and long-term human development. There is an overall increase in revenue estimates and pledges of economic stabilisation, the budget prioritises traditional security and shortterm fiscal balancing.
There are some economic positives: per capita income has risen to $1,824 from $1,662 in the previous year (9.7% increase) due to a stable exchange rate and improved economic activity, the surplus current account of $1.2 billion (0.3% of GDP), increase in remittances of 11% to $32 billion, and foreign reserves reached $14.3 billion which covers 3.6 months of import. The total revenue receipts are estimated at Rs 19.28 trillion, up from Rs 16.80 trillion in the revised estimates of 2024–25. Yet, much of this rise is driven by regressive indirect taxes and petroleum levies, deepening the financial strain on the middle class.
The government ambitiously aim to collect tax of Rs. 14.13 trillion, almost a 40% increase from the previous year. Non-tax revenues are expected to add Rs 3.58 trillion, and out of the divisible pool, 57.7% will be transferred to provinces as per the 7th National Finance Commission Award. The federal government will struggle to finance its expenditures, subsidies, and federal programs.
Out of Rs. 17.6 trillion in current expenditure, debt servicing alone consumes Rs 8.2 trillion, which will eat up more than 58% of the tax revenues (14.1 tr). Other expenditures will depend on borrowing and will remain trapped in the cycle of borrowing and repayments. The other large chunk of revenue will be spent on the defence budget (raised by Rs 368 billion), bringing the total allocation to Rs 2.6 trillion, while interior and police services continue to receive a substantial share of the federal purse.
Figure 1: Total expenditure in the budget 2025-26
The government has allocated only Rs 1 trillion for the Public Sector Development Programme (PSDP). Additionally, the federal education budget has been reduced from 0.8% of GDP to 0.7%. Even more concerning is the significant cut to the development budget for higher education, reduced from 66 billion to Rs 39 billion (See Figure 2). The financial crunch of public universities is already evident, as they are unable to meet operational costs. The health sector is allocated a mere Rs 31.97 billion and education Rs 112.68 billion – virtually unchanged from last year. As health and education are provincial subjects, but higher education is not fully devolved to the provinces, despite the 18th amendment, and the Higher Education Commission (a federal body) controls it. The world is investing in human capital as a demand of global competitiveness, but Pakistan is systematically neglecting its future.
Development budgets of several ministries such as the Climate Change Division, Federal Education and Training Division, IT and Telecom division, Science & Technology research division, National Food Security Division, and Industries and Production Division have been slashed (30% to 50%). Interestingly, there is an increased allocation for the national heritage & culture division (+ 65.1%), religious affairs & interfaith harmony (+ 30%) and Kashmir affairs and Gilgit Baltistan division (+ 52.0%). The problem is the decreasing investment in human capital, though some allocations are not large in absolute terms, but reflect skewed priorities.
The allocation for the Cabinet Division has almost tripled in just a year, and on top of that, there is a new allocation of Rs 2.5 billion for the parliamentary affairs division. Pakistan Post Office Department received Rs 24.454 billion, whereas, development expenditure of the National Vocational & Technical Training Commission (NAVTTC) is only Rs 4.9 billion, and the science and technology division received Rs 4.793 billion, which is 28% less than the previous year.
Figure 2: The snapshot of the federal education budget by the Institute of Social and Policy Sciences
Non-traditional security threats, particularly climate change are crucial, but the government has overlooked these. It is the most pressing challenge as Pakistan is declared to be one of the most climate-vulnerable and least prepared countries.
The budget of the Ministry of Climate Change has decreased from Rs 3.5 billion to Rs 2.7 billion – a symbolic 0.01 % of total federal resources. Senator Sherry Rehman has rightly termed this a “strategic mistake,” warning that the cuts weaken Pakistan’s credibility in global climate negotiations and hinder access to much-needed international climate finance.
In an apparent attempt to address environmental concerns, the government has introduced a Rs 2.5 per litre carbon levy on petrol, diesel, and furnace oil. While carbon pricing is globally recognized as a tool to curb emissions, its application in Pakistan is riddled with contradictions. The levy is projected to raise Rs 45 billion, a figure that pales in comparison to the Rs 1.47 trillion generated from general petroleum taxation, which shows that the intent is probably fiscal rather than environmental.
At the same time, the 18% sales tax on imported solar panels sends contradictory signals about Pakistan’s commitment to clean energy. Without investment in public transport, electric mobility, or renewable energy infrastructure, such levies are regressive and inflationary. The absence of a coherent climate adaptation plan, coupled with a failure to mainstream environmental protection across federal allocations, reflects a worrying erosion of state capacity to confront one of the gravest threats to national security.
Just as climate adaptation is ignored, the digital economy too faces a paradoxical approach. The federal government took a landmark step by formally recognising digital trade and expanding its tax regime. A 5% Digital Transactions Proceeds Levy is applied to all payments made to both domestic and international digital vendors. This shift is intended to broaden the tax net and ensure that global and local digital platforms contribute fairly to national revenue.
The problem is the imposition of the levy on gross revenue rather than net profits, posing a significant challenge for startups and e-commerce platforms operating on thin margins. Moreover, compliance responsibility has been shifted to intermediaries like payment processors, courier services, and banks – entities that may lack the capacity for such regulatory enforcement, thereby increasing operational complexity and legal risk. Alongside this, the application of an 18% VAT on online marketplaces, regardless of inventory ownership, brings informal e-commerce activity into the formal tax fold, tightening control over previously unregulated spaces. The new tax framework aligns Pakistan with international digital trade norms, potentially enhancing global integration. However, it could stifle innovation and impose unsustainable costs on local startups, becoming a barrier rather than a bridge for tech entrepreneurs without additional relief measures or targeted support.
This pattern of reactive, revenue-driven policy without parallel investment in human development reflects a broader problem: the government is not addressing the root causes of instability. Once again it failed to acknowledge that the most urgent threats to national security are internal: collapsing education systems, disappearing glaciers, growing poverty, and rising disillusionment.
A truly secure Pakistan will require more than military muscle and macroeconomic accounting. It demands a reimagined social contract; the government needs to shift to a people-centric, climate-inclusive, and strong provincial-federal fiscal arrangement for the growth and sustainable development of Pakistan, which is achievable only with a vision beyond fiscal survival.
